Executive Briefings

In the Internet Age, Supply Chain Is Still a Risky Business

All the technology in the world won't protect you against the myriad of events that can severely disrupt a global supply chain.

In the Internet Age, Supply Chain Is Still a Risky Business

Earthquakes, floods, tsunamis, fires, terrorist attacks, port strikes: the litany of potential disasters today is as long as it ever was. Never mind the ability of companies to communicate with suppliers in real time, and achieve pinpoint monitoring of their networks. The unpredictable will always be with us.

Still, there are a number of steps that managers can take to prepare for trouble, and even alleviate its impact when it occurs. And, with the age of e-commerce enabling the instantaneous exchange of information, it has never been more necessary to do just that.

The internet has evolved into an indispensable tool for tying supply chains together, but it also exposes companies to the possibility of cyber breaches, notes Bob Gazdik, risk control national director with Travelers. He stresses the importance of protecting the sensitive and proprietary information that flows between supplier and manufacturer.

There’s also a continuing need to ensure product safety and reliability. Gazdik cites numerous industry bodies and standards that were created toward that end: UL for electrical products, the Consumer Products Safety Commission, and the American Petroleum Institute, to name but a few. Some are voluntary, others mandated. But all can serve as guides for managing the kind of risk that’s engendered from within: the failure of manufacturers and suppliers to maintain proper quality controls.

Intimate knowledge of suppliers is a must. Most companies will undertake some form of vetting when acquiring a new supplier. They might be less diligent when it comes to continuous monitoring of an existing supplier relationship. And, as became evident during the Japan tsunami and Thailand floods, they might be ignorant of the degree to which they’re relying on sole sourcing, or even several suppliers located within the same region.

Gazdik recommends that buyers clearly communicate their specs and other requirements via multiple media, especially for small or medium-sized vendors that aren’t tapped into established channels such as supplier portals. In addition, third-party auditing services can be valuable resources for confirming the ability of a given supplier to meet the manufacturer’s requirements.

Third parties can supplement the data that comes directly from suppliers, so that buyers aren’t relying entirely on information provided by the latter. They can also play a key role in monitoring supplier quality on an ongoing basis, especially when it comes to elements such as humane working conditions at a plant.

Not every supplier can or should be tracked with equal diligence. Gazdik says companies should prioritize their supply bases and aim auditing initiatives at the most critical sources for product or components. Such partners will be examined on a more frequent basis.

At the same time, Gazdik says, Tier 1 suppliers should be required to notify the original equipment manufacturer of any change in sub-suppliers, product ingredients or the manufacturing process. That level of oversight can help to avoid the use of unapproved suppliers, such as reportedly occurred in the 2013 Rana Plaza building collapse in Bangladesh.

Companies should be aware of methods for transferring at least a measure of risk to suppliers, especially to avoid the complications that arise from suing foreign manufacturers over product-liability issues. The supplier in question might be required to produce a certificate of insurance, as well as agree to hold harmless or choice-of-venue clauses in their contracts. In the end, though, the responsibility for product failures within the U.S. lies squarely with the importer, who effectively becomes the manufacturer upon receipt of the item in question.

It’s therefore vital for companies to set up internal product-safety committees, as well as rely on independent testing to ensure product integrity, Gazdik says. Such efforts must involve individuals from multiple parts of the organization, including senior management, legal counsel and product design. All should be in the loop when it comes to scrutinizing manufacturing quality and product-safety codes.

None of these efforts, of course, can stave off a natural disaster or other event beyond the control of the manufacturer. But they can go a distance toward mitigating overall risk. On that score, says Gazdik, many companies today are falling short. In Travelers’ latest Business Risk Index, 48 percent of respondents said they believe the world is growing riskier – but only some 25 percent felt that they were doing a good job of preventing, preparing and responding to this heightened level of risk. The rest, notes Gazdik, “don’t see it as their number-one priority.” And that’s a sure recipe for disaster.

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Earthquakes, floods, tsunamis, fires, terrorist attacks, port strikes: the litany of potential disasters today is as long as it ever was. Never mind the ability of companies to communicate with suppliers in real time, and achieve pinpoint monitoring of their networks. The unpredictable will always be with us.

Still, there are a number of steps that managers can take to prepare for trouble, and even alleviate its impact when it occurs. And, with the age of e-commerce enabling the instantaneous exchange of information, it has never been more necessary to do just that.

The internet has evolved into an indispensable tool for tying supply chains together, but it also exposes companies to the possibility of cyber breaches, notes Bob Gazdik, risk control national director with Travelers. He stresses the importance of protecting the sensitive and proprietary information that flows between supplier and manufacturer.

There’s also a continuing need to ensure product safety and reliability. Gazdik cites numerous industry bodies and standards that were created toward that end: UL for electrical products, the Consumer Products Safety Commission, and the American Petroleum Institute, to name but a few. Some are voluntary, others mandated. But all can serve as guides for managing the kind of risk that’s engendered from within: the failure of manufacturers and suppliers to maintain proper quality controls.

Intimate knowledge of suppliers is a must. Most companies will undertake some form of vetting when acquiring a new supplier. They might be less diligent when it comes to continuous monitoring of an existing supplier relationship. And, as became evident during the Japan tsunami and Thailand floods, they might be ignorant of the degree to which they’re relying on sole sourcing, or even several suppliers located within the same region.

Gazdik recommends that buyers clearly communicate their specs and other requirements via multiple media, especially for small or medium-sized vendors that aren’t tapped into established channels such as supplier portals. In addition, third-party auditing services can be valuable resources for confirming the ability of a given supplier to meet the manufacturer’s requirements.

Third parties can supplement the data that comes directly from suppliers, so that buyers aren’t relying entirely on information provided by the latter. They can also play a key role in monitoring supplier quality on an ongoing basis, especially when it comes to elements such as humane working conditions at a plant.

Not every supplier can or should be tracked with equal diligence. Gazdik says companies should prioritize their supply bases and aim auditing initiatives at the most critical sources for product or components. Such partners will be examined on a more frequent basis.

At the same time, Gazdik says, Tier 1 suppliers should be required to notify the original equipment manufacturer of any change in sub-suppliers, product ingredients or the manufacturing process. That level of oversight can help to avoid the use of unapproved suppliers, such as reportedly occurred in the 2013 Rana Plaza building collapse in Bangladesh.

Companies should be aware of methods for transferring at least a measure of risk to suppliers, especially to avoid the complications that arise from suing foreign manufacturers over product-liability issues. The supplier in question might be required to produce a certificate of insurance, as well as agree to hold harmless or choice-of-venue clauses in their contracts. In the end, though, the responsibility for product failures within the U.S. lies squarely with the importer, who effectively becomes the manufacturer upon receipt of the item in question.

It’s therefore vital for companies to set up internal product-safety committees, as well as rely on independent testing to ensure product integrity, Gazdik says. Such efforts must involve individuals from multiple parts of the organization, including senior management, legal counsel and product design. All should be in the loop when it comes to scrutinizing manufacturing quality and product-safety codes.

None of these efforts, of course, can stave off a natural disaster or other event beyond the control of the manufacturer. But they can go a distance toward mitigating overall risk. On that score, says Gazdik, many companies today are falling short. In Travelers’ latest Business Risk Index, 48 percent of respondents said they believe the world is growing riskier – but only some 25 percent felt that they were doing a good job of preventing, preparing and responding to this heightened level of risk. The rest, notes Gazdik, “don’t see it as their number-one priority.” And that’s a sure recipe for disaster.

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In the Internet Age, Supply Chain Is Still a Risky Business